GEMS - The New Normal - Global Consumer Spending Outlook

In this Report:The New Normal•Value Creation and Consumer Choices•Global Consumer Spending Outlook and •Business Implications

The New Normal: Global Consumer Spending Outlook and Business Implications By Dr Yuwa Hedrick-Wong

Close-Up ReportJuly 2011

GEMSSMThE GlOBal EMErGING MarkETS SErVICE

ThE INSIGhT BurEau


ThE INSIGhT BurEau

© The Insight Bureau Pte Ltd

www.insightbureau.com/GEMS.html

This report forms part of a complimentary client subscription service and is not intended for general circulation.

Page 3 GEMS | Close-Up Report | July 2011

© ThE InSIGhT BUREaU PTE LTd GlOBal EMErGING MarkETS SErVICEGEMSSM

The New Normal There are three key drivers that raise private household consump-tion; the first is growth of employ-ment, the second wage increases and the third expanding consumer credit. These key drivers work either independently, or more potently, in combination. For example, wage increases leading to rising household income and consumer demand would in turn trigger more business investment which then creates more jobs, a phenomenon typically seen in a robust recovery phase of the business cycle. And when house-hold debts are generally low and wages are rising, household consumption can be boosted by more credit being made available to the consumers, without the increase in consumer debt becom-ing a concern. Indeed, under such circumstances, consumer credit acts as a healthy multiplier that allows the consumer to monetise some of tomorrow’s income for today’s use. Since the 2008/09 global financial crisis, however, it is quite clear that none of these key drivers of private household consumption is working properly. For instance, in the US, the largest consumer market in the world, unemploy-ment has remained stubbornly high and households are trying to pay down their debts with any spare cash that they have. From a peak of 135% of average annual disposable income in 2008, house-hold debts in the US have steadily declined to around 123% in early 20111. While this is a move in the 1 Federal Reserve.

right direction, the amount of household income that is used to pay down debt also automatically reduces households’ consumption demand. So the growth of the consumer market in the US is unlikely to return to the pre-crisis level for quite some time to come. What is true for the US is equally true for other developed markets. In the Euro Zone, the volume index of retail sales has been flat since 3Q last year. Any data showing increases in retail sales only reflect price increases, in other words, inflation. Data coming out of the strongest and best performing economy in Europe, Germany, are indicative. Since the beginning of the year, German consumer durable orders from the Euro Zone have been contracting. It is exports to outside of the Euro Zone that have kept the German economy humming, while domestic durable goods’ orders are up a modest 5% year-on-year. This is in spite of Germany’s record low unemploy-ment and strongest GDP growth in 20 years. In fact, the challenge of the situation today can be summarised in terms of a contrast between three groups of markets: devel-oped, emerging, and transitional and their respective shares of growth in consumer demand before and after the 2008/09 crisis2. Collectively, these three

2 These three groups of markets are: (i)

developed: US, Japan, Australia, South Korea, Hong Kong,

Singapore, UK, Austria, Denmark, Finland, France, Ger-

many, Italy, Netherlands, Norway, Sweden; (ii) emerging:

groups of markets account for the lion’s share of the growth of global household consumption. The transitional markets are the key Eastern European countries and they are included because they experienced super fast growth in household consumption in the decade prior to the crisis. As Table 1 shows, the average annual growth rates over the 2000 to 2008 period range from 7% for the developed markets to an amaz-ing 35% for the transitional markets, with the group of the most significant emerging markets averaging over 19% per year. Table 1 Average Annual Growth Rates in Houshold Consumption, 2000-2008 All Three Groups 9.1%Developed Markets 7.0%Emerging Markets 19.3%Transitional Markets 35.0%

(CEIC, Eurostat) Due to the massive difference in the respective size of their con-sumer markets, however, the picture looks completely different when it comes to the shares of overall consumption growth between the three groups of markets. For example, in 2008, the size of the consumer market of the group of developed markets is estimated at US$22.2 trillion. In comparison, the size of the con-sumer markets for the emerging China, India, Brazil Russia, South Africa, Turkey, Mexico,

Nigeria, Egypt; (iii) transitional: Belarus, Bulgaria, Czech

Republic, Georgia, Hungary, Poland, Romania, Slovakia,

Ukraine.



and transitional markets are estimated at US$5.6 trillion and US$0.9 trillion respectively. Consequently, as seen in Chart 1, the developed markets account for 65.5% of all the increase in household consumption over the 2000 to 2008 period; whereas the emerging markets account for only 28.7% of the total. The transitional markets trail even further behind with a 5.7% share of total growth. It is this preponderancy of house-hold consumption in the devel-oped markets that is of concern in the post-crisis global economy. Even though emerging markets have appeared to be able to keep powering ahead in spite of the crisis and the anemic recovery, the question is whether the growth of consumer spending in emerging markets (and in combination with the transitional markets) is enough to compensate for the stagnation in the developed markets. This concern is illustrated in Table 2,

which shows the growth rates of household consumption over the 2009 to 2010 period in these three groups of markets. As expected, growth in the developed markets averaged a miniscule 0.13% a year, in sharp contrast with 8.8% in the emerging markets. The transitional markets actually went into contraction, shrinking by 8.5% a year over this period. Thus, in spite of an otherwise respectable performance of 8.8% growth in consumer spending in the emerging markets, the overall growth for the three groups of markets came to only 1.6% in this period. Table 2 Average Annual Growth Rates in Household Consumption, 2009 - 2010 All Three Groups 1.6%Developed Markets 0.13%Emerging Markets 8.8%Transitional Markets -8.5%

(CEIC, Eurostat)

It is therefore an important question to ask today where growth in the consumer market will come from in the global economy over the next five years, given the poor prospects in the developed markets and the uncer-tain outlook in the transitional markets. This is not just an academic exercise in number crunching, however. There are far-reaching implications for global businesses when the dy-namics of demand change in the consumer markets. This is be-cause consumption lies in the heart of value creation in a market economy. It is consumer demand that determines whether busi-nesses have been able to create value in investing in their prod-ucts and services. For global businesses therefore getting consumer markets right will be crucial to their future success, in terms of from where and how growth will come.

Chart 1 Global Shares of Household Consumption Growth



The role that consumption plays in economic growth and value creation is often misunderstood as well as under-appreciated. In many societies, frugality is praised and, by implication, this means that saving and investment is good and that consumption is, at best, to be kept modest. In the after-math of the 2008/09 financial crisis, such sentiments are further boosted by a backlash against the debt-fueled consumption of in the US and much of Western Europe in the past decade. And, yet, investment and production, without the guiding hand of consumer choices and demand, inevitably leads to capital misallo-cation and business failure. It is consumption, and consumption alone, that ultimately creates value. History abounds with such examples, if we know where to look. Value Creation and Consumer Choices An American clipper sailed up the Hooghly River to deliver a most peculiar cargo in Calcutta in the late 1870s. It carried in its hulk large blocks of ice chipped from lakes in Massachusetts, in north-east US. Shippers found that when properly insulated with saw dust and stored in the hulk of ships, about two thirds of the ice blocks could survive the long, six-month journey to India. In the 19th century, the hot weather was probably one of the most daunting challenges to the British colonialists in India. The British colonial officials first

discovered the hills, places at higher elevation where the weath-er was cooler, especially during the summer. Hill stations were established all over India, the most famous of which was Simla, nestled in the foothills of the Himalayas, to which the Viceroy and his army of clerks and officials escaped for the summer. The hill stations were a partial solution to the British’s yearning for cooler weather. Another partial solution was to import it. The way to import cooler weather to India in the 19th century turned out to be importing ice from New England. It is estimated that in the 1870s New England was exporting 12,000 tons of ice a year to India3. We can only imagine what was in the minds of the Indians who lined the river banks to watch the “ice ships” unloading this strange cargo in Calcutta. A happy bemusement was probably what was in the minds of the New Englanders who were being paid to saw and pack the ice, a free gift from nature as far as they were concerned, to be shipped to India. But that is neither here nor there. As long as the British in India wanted ice, and were prepared to pay for it, their consumption choice set into motion a compli-cated supply chain, made possible by ingenious innovations. This example of shipping ice to India highlights a profound truth about value creation that is typically and frequently complete-ly misunderstood. There is a 3 Beattie, A. 2009. False Economy – A Surpris-

ing Economic History of the World. New York: Riverhead

Books.

natural bias to focus on the production process as the source of value creation. Superficially it seems to make sense that value is created when something is being produced. After all, if we paid X dollars for a gadget, then surely the producer of that gadget produced X dollars’ worth of value. In this instance, however, what common sense tells us is completely and utterly wrong. Take, for example, a car being displayed in a show room. Re-gardless of how costly the manu-facturing, how brilliant its design, or how lavishly it is furnished, it has exactly zero value before it is sold, whatever its price tag says. The economic value of this car comes into existence the very moment a consumer makes the decision to buy it. The price willingly paid by the buyer is the value of the car. The creation of economic value, therefore, is intimately intertwined with the act of consummating a transac-tion, and value is created at the very moment that the exchange is consummated between the buyer and the seller. Thus, while value creation lies at the heart of the economic process, consumption

“The role that consumption plays in economic growth and value creation is often misunderstood ...for global businesses, getting consumer markets right will be crucial to their future success...”



lies at the heart of value creation. Consumption choices are driven by consumer tastes, which can vary greatly from place to place, and from time to time. Consum-er taste ultimately determines how consumption choices are made. Taste is, by definition, subjective and could be notoriously whimsi-cal. But, consumer taste, however arbitrary and fanciful, has been one of the most powerful driving forces in history in mobilising societies to venture into the unknown at great risks, and in consequence, affecting how peoples and societies interact, propelling advances in technology and stimulating innovations in business and commerce. Some may think that we are grossly exaggerating our case and may dismiss the example of shipping ice to India as trivial, a case of well-paid servants of the British Empire indulging in their taste for iced gin & tonic in the hot weather. So let us look at two other examples of how consumer taste and choice stand out for having had a powerful impact on shaping world history in the past two millenniums; silk and spices. The taste for silk is easier to relate to, even by today’s standard of affluence and abundance, whereas the taste for spices, on the other hand, may seem more quixotic and the prices they fetched out-right bizarre. And yet both have been immensely important in changing history in virtually every corner of the planet. In ancient Rome, silk from China was an item of rare luxury and

much sought after by the patri-cians, the elite of Roman society. Traditional local materials for clothing were predominantly scratchy wool or crinkly linen, supplemented by heavy animal skins. They all sound terribly uncomfortable. In contrast, the gentle softness and ephemeral lightness of silk, with its touch on bare skin bordering on the sensu-ous, was heavenly. Furthermore, silk came in a variety of luxuriant colours, outclassing the dull, monotone of wool and linens. So it is not surprising that silk be-came an instant hit when it arrived in Rome around the first century AD. How did it get to Rome? The answer is with great difficulty and only after a long and arduous journey. Silk arrived in Rome before the fabled Silk Road came into existence. Traders in south-ern China loaded their ships with silk and sailed along the coasts of Indochina, then around the Malay Peninsula into the Bay of Bengal. They exchanged goods with Indian merchants there, who in turn sailed across the Arabian Sea to trade with Greek and Arab middlemen. Then the cargo of silk was transported up the Red Sea by barges. At the northern tip of the Red Sea, it was loaded onto camels which carried it across the desert to reach the Nile. From the Nile it was again transferred to ships to ferry it to Alexandria, where Greek and Roman ships awaited. These vessels then carried the silk across the Mediter-ranean to its final market; Rome4. 4 Warmington, E.H. 1995. The Commerce

between the Roman Empire and India New Delhi:

This was a very long supply chain indeed, linking the Roman and the Chinese Empires in the first century AD. Neither the Romans nor the Chinese had firsthand knowledge of each other. All the Chinese knew was that there were these people living in a land far to the west where the sun set who wanted their silk. The Romans, on the other hand, had heard all sorts of second and third hand stories about China, mostly fanciful exaggerations or sheer fab-rications. The Romans certainly had no idea whether silk is fauna or flora or exactly how it was produced. Silk in China was expensive to begin with. Its price in Rome was easily a hundred fold higher. The fact that wealthy patrician Ro-mans were prepared to pay the high prices for silk justified every single transaction along this long and arduous supply chain, render-ing the immense amount of logistics engaged profitable. It also brought about sustained cultural exchange between the different communities involved in the trade. For example, the Christian communities in South India today were established around that time, at least 1,500 years before the arrival of the European missionaries in the 17th and 18th century. An equally long and difficult supply route started to operate in the second century AD from Western China during the Han Dynasty across central Asia to reach Rome. This is the famous Munshiram Manoharlal.



Silk Road. The Silk Road was never actually a single road. There were two main routes, the north-ern and the southern, each with many branches. It was the trade along the Silk Road that bought fortunes to the fabled cities of Samarkand, Isfahan, and Herat, populated by multi-ethnic com-munities of Jewish, Armenian, and Syrian middlemen. Bud-dhism eventually found its way to China from India along the Silk Road. The traffic along the Silk Road fostered the development of the practice and protocols of diplomacy between the Chinese Empire and rulers of Central Asia, encouraged the invention of travel accommodations, the caravanserai and stimulated innovations of rudimentary forms of trade finance and credit. All these came about because of the Roman patricians’ taste for silk. If the Roman taste for silk is understandable, the Europeans’ craze for spices in the Middle Ages would seem bizarre to the modern eye. The spices that were so sought after in Europe came from a few islands in tropical Asia. Cloves, for instance, originally grew only on five tiny specks of land in north Moluccas, an island group in today’s eastern Indonesia. Nutmeg and mace came from the Bandas, a group of nine small isles in the southern Moluccas. These were the fabled Spice Islands and they are very far away from Europe indeed, even with today’s transcontinental flights. To reach the Spice Islands from Western Europe in the Middle Ages would be the equivalent of a space flight

today. For one thousand years after the appearance of spices in Europe, no Europeans, not until the 16th century, had any clue as to where these Spice Islands were. Spices were exotica personified for medieval Europeans. They were associated with myths of one kind or another. Some spices were believed to be endowed with potent medical effects and they were used to treat all sorts of ailments, including as a prophy-lactic against the plague. It was also popular as an aphrodisiac at one time or another. Rich house-holds also used them to flavor their food and drink and fumigate their clothes and closets. The wealthy Europeans were prepared to pay a small fortune for such spices.

The fact is, however, that Europe-ans could certainly do without these spices. They did alright for the longest time before the arrival of the spices. It is hard to make the case, objectively, that the arrival of spices had improved significantly the quality of life of the Europeans. There is simply no evidence that the use of spices had enabled Europeans to live longer or healthier lives. And, yet, once these tropical spices arrived, Europeans became infatuated with them. And they were very expen-sive. The splendor and power of Venice, at the height of its glory,

embodied the wealth generated by the spice trade, with its grand and magnificent architecture, art work, public squares and canals, all built on the profits generated by Vene-tians’ dominance in the Mediter-ranean trade in cinnamon, nut-meg, mace and cloves. Venetian galleys transported three and a half million pounds of spices each year, prior to the Portuguese penetration of the Indian Ocean at the turn of the 16th century. There is clearly no accounting for taste5. The strong demand and the exorbitant profit of the spice trade led inevitably to business and technological innovations in attempting to cut out the middle-men that dominated the trade. In today’s marketing lingo, it would be characterised as the disinterme-diation of the incumbents. This was what the Portuguese tried to do. The tropical spices reached Europe from the Spice Islands via a supply chain that rivaled the complexity and difficulty of that of silk from China. Islanders of the Spice Islands did not have much use for the spices themselves, and since the spice trees were found in nature and not cultivated, they were of practically no economic value to the islanders. So the islanders happily traded with the legendary Bugis, the seafarers from Sulawesi, an area situated half way between the Spice Islands and the island of Java. The Bugis carried the spices north across the South 5 See Lane, F.C. 1973. Venice: A Maritime

Republic. Baltimore: Johns Hopkins University Press.

“The strong demand and the exorbitant profit of the spice trade led inevitably to busi-ness and technological inno-vations...”



China Sea and traded with Chi-nese and Indian merchants who in turn took the goods westward, following roughly the same trade pattern of silk. In the 16th century, the Portu-guese made major advances in their ship design, navigation skills, and map making. This time period became known in history as the age of exploration. But, as it turned out, it was also the age of business disintermediation. In the 16th century, conquistadors like Bartholomew Diaz and Vasco da Gama, hugging the coast of Africa, rounded the Cape of Good Hope and sailed into the Indian Ocean. From there they started to cut out the Indian and Arab middlemen and fought to control the shipping and trading of spices to Europe themselves. In fact, it was the Portuguese who first recognised the strategic value of the deep harbour which was sheltered among several closely clustered islands in the west coast of India and established a toehold there, calling it Bom Bahia, the “good bay” and anglicised into Bombay once it passed into British hands later on. In 1512, Ferdinand Magellan, a veteran Portuguese conquistador who had sailed, fought and survived many skirmishes in the Indian Ocean, conceived the idea of circumnavigating the globe by sailing round the extreme end of South America which he believed would lead him to the Indies from the opposite direction of the route that rounded the Cape of Good

Hope in Africa. He argued that in so doing it would also allow him to pin down the exact where-abouts of the Spice Islands and taking control of them while he was at it. By 1517, he secured the backing of the Spanish court for his enterprise and two years later he led a multinational crew in five vessels to sail into the Atlantic in one of the most astonishing voyages of discovery. Ignorance played a huge role in this enterprise. Magellan and his team of cartographers and astron-omers had seriously underestimat-ed the circumference of the globe, on which was founded their confidence of success. Had they been able to come up with an accurate estimate of the distance that they needed to cover, it is very doubtful they would ever have set sail. In any event, the expedition was beset with one disaster after another. And Magellan himself was killed in an altercation with natives on an island in today’s Philippines (yet that did not prevent the expedi-tion naming the islands after the Spain’s King Philip). Finally, two surviving vessels, leaky and manned by emaciated, skeleton crews, guided by a captured local pilot, found one of the Spice Islands; Tidore. The crew traded with the local sultan and loaded their hulks full with cloves and set sail for Spain. Only one vessel managed to complete the voyage. And yet the value of the cargo, based on the willingness of wealthy Europeans

to pay for the spices, was so high that the profit margin of the lone surviving vessel, Victoria, which arrived in Spain with 26 tons of cloves, it paid for the entire expedition with some change to spare. The King of Spain awarded Juan Sebastian de Elcano, who guided the ship back to Spain, a handsome pension and a coat of arms of two cinnamon sticks, three nutmegs and a dozen cloves6.

What followed was four centuries of the rise of European colonial expansion, technological progress and, last but not least, the spread of evangelical Christian missionar-ies to all corners of the world. It would be simplistic to say that all these were the result of the Europeans’ taste for spices and their willingness to pay for them. Counter-factual historical hypoth-eses may suggest that if it were not for the spices, it would have been something else that drove the Europeans overseas to conquer, loot, pillage, preach and convert, and on the positive side of the ledger, to trade, invest, educate, and enlighten. Counter-factual

6 Bernstein, W.J. 2008. A Splendid Exchange:

How Trade Shaped the World. New York: Atlantic

Monthly Press.

“...consumption choices create value, and it is this value creation process that mobilised not only businesses but adventurers, royal courts and whole societies...”



history or otherwise, however, it could not be denied that it was a consumption choice that ignited much of what came after during this age of exploration. This is because consumption choices cre-ate value, and it is this value cre-ation process that mobilised not only businesses but adventurers, royal courts and whole societies to pursue such values, and in the case of the trade in silk and spices, molded world history. The common thread in all three examples -- ice, silk and spices -- is the disparity in value between the place of their origination and production and the place of their consumption. This is a direct reflection of the difference in the value placed on these products by the consumers; ice in the winter had practically no value for New England farmers, but huge value for the British in India; silk always commanded good value for the Chinese but great value the Ro-man patricians; spices were liter-ally indistinguishable from weeds for the islanders on Bandas and Tidore but meant fantastical value for Europeans. In all instances, the physical nature of the prod-ucts remained unchanged. The only difference lay in how they were consumed. In other words, it is the act of consumption that created fantastic values for ice in India, silk in Rome and spices in Europe. The value creation process de-scribed by these three examples remains fundamentally unchanged

today. Of course, things move a lot faster now compared with the sailing ships of the 19th century, let alone two millenniums ago. A lot more goods are also being moved from one end of the earth to the other, and not just luxury items. It is no exaggeration to say that our planet today resembles more and more a gigantic bazaar. Yet now, as in the past, at the very centre of this global bazaar is the consumer. At the end of the day, it is the consumer’s choice, ability and willingness to pay that creates value for all the goods and services that are on display in the global bazaar.

Global Consumer Spending Outlook and Business Implications In the New Normal of post-crisis global economy, the dynamics of consumer markets is undergoing a profound transformation that is both quantitative and qualita-tive. The quantitative aspect is a result of the diverging growth rates between the developed and the emerging markets in their economies and consumer markets, resulting in what has

sometimes been referred to as the “two-speed” global economy. The qualitative side, however, is far more important in terms of business implications and it comes about because of the role of con-sumption in value creation. In the coming years, choices by consum-ers in emerging markets will begin to dominate in determining how values are being created in the consumer markets. On this critical point, it is not just the difference in overall growth that matters, but it is the rising share in the growth of discretionary consumption in the emerging markets that will be decisive. A scenario of consumer market growth in the next five years is developed to illustrate this chang-ing dynamics of global consumer markets. Conservative assump-tions are used for projecting the average annual real GDP growth over the 2011 to 2016 period. It is 2% for the developed markets, 6% for the emerging markets and 4% for the transitional markets -- all significantly below their respec-tive average during the previous decade. The ratio between house-hold consumption and real GDP

Table 3 Ratio of Household Consumption to Real GDP Growth

Ratio of HH consumption to real GDP growth, 2000 – 2008

Ratio of HH consumption to real GDP growth, 2011 – 2016

Developed Markets 2.55 1.0Emerging Markets 3.24 2.5Transitional Markets 6.18 2.0

(GEMS)



growth is also assumed to be lower for the all markets7. As Table 3 (previous page) shows, in the de-veloped markets where every 1% growth in real GDP in the 2000 to 2008 period induced 2.55% growth in household consump-tion, the forecast is that every 1% growth in real GDP will induce only an equivalent 1% growth in household consumption in the next five years. Similarly, the ratio is reduced from 3.24 to 2.5 for the emerging markets, and from 6.18 to 2.0 for the transitional markets.

The shares of total household consumption between the three groups of markets between 2008 and 2016 are shown in Chart 2. The developed markets’ share will drop from 77.4% in 2008 to 7 The exception is China, where the next

five years is likely to see a structural shift in its domestic

economic re-balancing, which will see household consump-

tion’s share in GDP rise steadily. See GEMS Close-Up

Report, Keeping Steps with the Dragon’s Dance: China’s

Rebalancing and Global Implications. April 2011.

58.3% in 2016. The share of the emerging markets, on the other hand, will increase from 19.5% in 2008 to 38.7% in 2016. The share of the transitional markets will remain basically unchanged. From a simply quantitative point of view, this means that the size of household consumption in emerg-ing markets will be around two-thirds of that of the developed markets by 2016, up from being

one-quarter in 2008. Expressed in terms of annual addi-tion in consumer spending, how-ever, emerging markets will pull ahead of the developed markets. As Chart 3 shows, over the 2012 to 2016 period, emerging markets will add an average of US$1.2 trillion of consumer spending to the global economy per year, whereas the developed markets

Chart 3 Increase in Global Household Consumption

Chart 2 Global Shares of Total Household Consumption



GEMS©GEMS©

Chart 7 A sia’s Exposure to the Eurozone

13.2%

6.1%

15.6%

4.9% 4.5%5.3% 5.5%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%

Australia China India Singapore M alaysia Indonesia Thailand

Column1

Impact on Asian exports to Eurozone from 1% change in Eurozone’s GDP (estimated from CEIC data)

will add only around US$700 billion annually. The transitional markets will add another US$95 billion. It is this difference in the incremental increase in consumer demand that will firmly put the emerging markets in the driver’s seat. A great deal of the increase in household consumption in the emerging markets is undoubtedly in basic necessities. From a busi-ness perspective, if the change in incremental growth is driven by consumption of basic necessities and nothing else, then the impact may not be that significant. It is change in discretionary consump-tion that the business impact will be strongly felt 8. As it turns out, the change in shares of growth in discretionary consumption is no less dramatic in the New Normal of the coming years in the global economy. Table 4 summarises the estimates made on such changes for the developed, emerging and transitional markets, contrasting the 2000 to 2008 period with the 2012 and 2016 period. Between 2000 and 2008, the developed markets accounted for a whop-ping 88.2% of the global growth in discretionary spending, while the emerging markets accounted for only 9.2%, followed by the transitional markets with 2.6%. Under these conditions, it would not be an exaggeration to say 8 Discretionary consumption refers to con-

sumer expenditures that are not of a routine nature such as

basic food items, daily transport needs, and basic housing.

In emerging markets, a household with an annual income

below US$6,000 is likely to spend most of the disposable

income on basic necessities, with little left for discretionary

spending. Hence the rise in discretionary spending in

emerging markets is highly correlated with rising numbers

of households with annual income exceeding US$6,000.

that consumers in the developed markets, due to the dominance of their demand, single-handedly drove the value creation process through their choices, tastes and preferences. In the coming five years, however, the shares of growth in discretionary spending will be about equal between the developed and emerging markets (49.0% versus 47.8%). This is a significant milestone, very pos-sibly the first time in the last 200 years when consumers in emerg-ing markets (the Third World, the under-developed or the colonies as they were previously known) drive value creation in equal measure with consumers in the developed markets. That being the case, consumer choices, tastes and preferences in emerging markets will also be-come a much important consider-ation for global businesses regard-ing where and how investment is to be made, and what products and services to create. In many important aspects consumers are different between the developed, emerging markets and transitional markets. Chart 4 (on the next page) highlights one such aspect, the age of the consumer. The size of “active consumers”, defined as those aged 15 to 65, as expected, is much bigger in the emerging

markets than the developed or the transitional markets. More im-portantly, however, the numbers of active consumers are expected to continue to rise in the coming years in the emerging markets, whereas they are projected to be basically unchanged in the devel-oped markets and declining in the transitional markets. This implies that the consumer markets are a lot younger in the emerging mar-kets than in either the developed or the transitional markets. The younger consumers in the emerging markets will have far-reaching business implications in terms of how to leverage technol-ogy trends, engage information and marketing channels, and prepare for the pace and direction of their lifestyle trends. The youth consumer segment is also all about the future, and consequently, busi-nesses will have to become a lot more forward-looking than before. Younger consumers also tend to be more optimistic. Thus, the rise of the youth consumer market will inject much needed optimism into the global economy as well. The current backlash against big business and unbridled consump-tion is intertwined with a deepen-ing pessimism about the future. The fact is that there is an abiding

Table 4 Shares Growth in Discretionary Consumption

2000 to 2008 Average

2012 to 2016 Average

Developed Markets 88.2% 49.0%Emerging Markets 9.2% 47.8%Transitional Markets 2.6% 3.2%

(GEMS)



tendency in the human psyche of seeing the future in bleak terms. Consider the opening words of Agenda 21 of the United Nations Conference convened in Rio de Janeiro in 1992, signed by world leaders unanimously: “Humanity stands at a defining moment in history. We are confronted with a perpetuation of disparities within and between nations, a worsen-ing of poverty, hunger, ill health and illiteracy, and the continued deterioration of the ecosystems on which we depend for our well-

being.” And yet, according the United Nations’ own data, the fol-lowing decade saw the fastest de-cline in poverty, hunger, ill health and illiteracy in human history. The same kind of pessimism about the future is once again rearing its ugly head today. An alliance of traditional anti-business lobby and new fangled anti-growth activists is becoming more assertive, usurp-ing the moral high ground in the aftermath of the 2008/09 crisis. Listening to them, the world

is stumbling toward either an ecological apocalypse, or financial anarchy, or political chaos -- or all of the above. Rising household consumption in the emerging markets, and the vigour of their youth consumer segment, will powerfully mitigate the prevailing tide of pessimism. It is also the strategic window of opportunity for global businesses to create value for the future.

GEMSDisclaimer

While every effort has been made to ensure the accuracy of the content and analysis contained in this report, neither The Insight Bureau Pte Ltd

nor the GEMS Editor accepts any liability for the consequences of any actions taken on the basis of the information provided.

Distribution Rights

This report forms part of a client subscription service, or has been offered on a complimentary basis. You may share this report with colleagues but

distribution outside of your organisation is not permitted without the express permission of The Insight Bureau. You are not permitted to post GEMS

reports on your website or on an extranet.

Chart 4 Active Consumers, 15 - 65

ABOUT US

The Global Emerging Markets Service of The Insight Bureau

GEMS is an exclusive subscription service for clients of The Insight Bureau pro-vided in partnership with Dr Yuwa Hedrick-Wong. It is designed to provide senior international executives and boards with timely, actionable business intelligence about the world’s most dynamic growth markets. Consistent with The Insight Bureau’s mission to help senior executives make better business decisions, GEMS has been launched to explain the crucial linkages between the world’s developed economies and the developing world, to identify the main drivers of growth, to highlight significant changes, to assess the threats and opportunities facing inter-national businesses, to provide a reality-check about popularly-held assumptions and to alert executives about the likely implications of recent events or develop-ments.

The Insight Bureau provides speaker placements and briefings as a service that helps achieve a better understanding of the world in which we do busi-ness and to ultimately help senior executives to make better business decisions. The Insight Bureau represents Dr Yuwa Hedrick-Wong for speeches and briefings. www.insightbureau.com

Dr Yuwa Hedrick-Wong

Yuwa Hedrick-Wong is a global economist and business strategist, based in Singapore. He is the HSBC Distinguished Visiting Professor of International Business at the University of British Columbia in Canada, as well as being the global economic advisor to MasterCard, ICICI and Southern Capital Group. Along with other leading economists, journalists and business commentators, Dr Hedrick-Wong belongs to The Insight Bureau’s resource network, providing speeches and presentations at business conferences and also delivering confidential, in-house briefings to senior executives and boards. www.insightbureau.com/YuwaHedrickWong.html


ThE INSIGhT BurEau

Learn more about GEMS and how to subscribe to the service here:

Website: www.insightbureau.com/GEMS.html Email: [email protected] Telephone our Singapore office: +65-6300-2495, ask to speak to Andrew Vine

The Insight Bureau

© The Insight Bureau Pte Ltd | www.insightbureau.com/GEMS.html

Date post:	12-Mar-2016
Category:	Documents
Upload:	the-insight-bureau
View:	216 times
Download:	2 times

GEMS - The New Normal - Global Consumer Spending Outlook

Documents